Further digging today revealed a problem. I set up my subdomain in Google Webmaster Tools and found a message waiting for me. It said that my site (subdomain) had been removed due to violation of Google's guidelines.
Long story short. Some spammer had managed to modify my wordpress footer.php file and insert at the bottom a huge list of links to spam sites and filled with loads of spam words.
I have now removed the violation, upgraded wordpress to 2.5.1 from 2.0.2 and set my directories on the server to 755 permissions. Lucky no further damage was done I guess.
I suspect my site will reappear in the index shortly. (For some reason I couldn't see the reinclusion link in webmaster tools under that domain).
Negative
SEO at its best!